De Beers’ diamond dilemma

De Beer’s diamond sales have been under pressure in recent years due to far cheaper manmade alternatives. The company barely contributes to the bottom line of its parent company, Anglo American. 

To ward off a takeover from the world’s largest miner, BHP, Anglo American announced a wide-ranging overhaul of its business. 

This included the sale or demerger of De Beers alongside its platinum business and coal mines in Australia. 

The company’s willingness to dump De Beers may signal its desperation to effect a successful turnaround, but it is more likely to reflect the rapidly declining demand for natural diamonds. 

Christiaan Bothma, an investment analyst at Sanlam Private Wealth, said it is unlikely that Anglo will get full value for De Beers in the current market. 

While Anglo has said it will not be rushed into selling De Beers, the current environment of declining sales will not change anytime soon. 

De Beers’ sales have come under severe pressure in recent years as the company has been forced to cut prices to stimulate demand. 

In January, it cut the price of its diamonds by 10% to boost demand following a complete halt in supply in the second half of 2023. 

These tactics have not been successful, with prices remaining under pressure largely due to the increasing popularity of manmade alternatives. 

For the latest quarter, De Beers’ sales declined by 18% compared to the previous period.

“This is probably the scariest threat diamond mining has faced in the past 100 years since supply from South Africa threatened to flood the market,” director of mining at Modern Corporate Solutions Peter Major said. 

He explained that demand is not declining because people cannot afford diamonds anymore but because manmade diamonds are taking over the market. 

Diamond miners are facing a perfect storm. Demand for their product is declining, while supply is increasing due to manmade alternatives entering the market. 

For the first time in 100 years, diamond miners, led by De Beers, do not have a stranglehold on the supply of the precious gem. 

Historically, miners have been able to increase their prices in line with the rising cost of mining diamonds by artificially limiting supply. This is not the case anymore. 

At the same time, the costs of mining diamonds are rising, and the price of the gems is declining, putting miners under severe pressure. 

The graph below shows Anglo’s revenue sources according to the commodities it sells. Diamond sales contributed a negligible amount in 2023, declining sharply in the past decade. 

Anglo better off without De Beers

Bothma said that Anglo is likely to fare far better without its platinum assets, De Beers, or its Australian coal mines. 

“With Anglo’s new break-up plan, we think it’s highly likely that the group’s share price will trade at or above the current BHP offer price again within the next few years.,” he said. 

“We, therefore, see a favourable risk-reward trade-off from current levels, with the downside likely capped now that the value of the copper assets has been clearly shown to the market by BHP’s offer.”

This is largely due to the growing trend of investors forcing miners to end their diversified mining models, in which multiple commodities are sold by a single company. 

Thus, Anglo’s unbundling may make the company an even more attractive target for its larger peers, with its copper business likely to fetch a higher price than currently attached to it. 

The new Anglo American won’t be the diversified behemoth it once was, nor will it be as shiny without its precious metal asset. 

However, with management now very focused on delivering value to shareholders, Bothma said Sanlam Private Wealth will continue to see the merits of owning the stock in our client portfolios.

The graph below shows a breakdown of the market capitalisation of a few of the largest mining companies in the world compared to that of Anglo American and the projected value of the company after its new strategy is executed.